Chapter 4

Accounting Principles, Concepts and

Policies

Glossary

Accounting concepts
Broad basic assumptions which underlie the accounting for items which appear in
the periodic financial statements of business enterprises.

Accounting entity concept

Financial statements represent the performance and financial position of the
business unit only and do not include any assets, liabilities, income or expenditure
that are not related to the business. This concept is otherwise known as the entity
concept or the business entity concept.

Accounting policies
The specific principles, bases, conventions, rules and practices applied by an entity
in preparing and presenting financial statements (IAS 8).

Accounting principles
A term which comprises the objective of financial statements, the underlying
assumptions of accounting, the qualitative characteristics of financial statements,
comprising understandability, relevance, reliability and comparability, the elements of
financial statements such as assets, liabilities, ownership interest (equity),
performance, income, expenditure and capital maintenance, recognition of the
elements financial statements, the measurement of the elements in financial
statements and the concepts of capital maintenance.

Accruals concept
The effects of transactions and other events are recognised when they occur (and
not as cash or when its equivalent is received or paid) and they are recorded in the
accounting records and reported in the financial statements in the periods to which
they relate.
Accrued expenses
Costs are recognised when they occur, and not when money is paid. Goods and
services are deemed to have been purchased on the date they are received and
services consumed; where no invoice has been received at the end of an accounting
year (e.g. electricity, gas, telephone) these are treated as a cost for that year.

Assets
Resources controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

Business entity concept

Financial statements represent the performance and financial position of the
business unit only and do not include any assets, liabilities, income or expenditure
that are not related to the business. This concept is otherwise known as the
accounting entity or the entity concept.

Consistency concept
Allows the user to look at a set of financial statements over a number of years, for an
entity, and to assume that the same methods, policies and estimation techniques
have been used from year to year.

Current cost
Assets are carried at the amount of cash or cash equivalents that would have to be
paid if the same or an equivalent asset was acquired currently.

Deferred income
Income received for a number of periods should be spread over the period to match
against the costs that are incurred in generating the revenue. The process of
carrying the income to future period is known as deferring the income, and it is
carried to future periods in the statement of financial position as a liability.

Double entry
Otherwise known as the duality concept or dual aspect, assumes that every
transaction affects two accounts in a set of financial statements in such a manner as
to keep the accounting equation in balance.

Duality concept/dual aspect

Otherwise known as the dual aspect concept or double entry, assumes that every
transaction affects two accounts in a set of financial statements in such a manner as
to keep the accounting equation in balance

Earnings management
When the preparers of financial statements use accounting adjustments to alter the
reported performance of the reporting entity. They usually try to smooth profits, i.e.
to show steady profits.

Entity concept
Financial statements represent the performance and financial position of the
business unit only and do not include any assets, liabilities, income or expenditure
that are not related to the business. This concept is otherwise known as the
accounting entity or the business entity concept.

Estimation techniques
The methods that are used to apply accounting policies.

Expenses
Decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or increases in liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.

Fair value
The amount for which an asset could be exchanged or a liability settled, between
knowledgeable, willing parties in an arms length transaction.

Going concern
The assumption that an entity will continue in operational existence for the
foreseeable future.
Historical cost concept
Assumes that all the transactions in an entitys financial statements reflect the actual
cost price billed, or revenue charged, for items.

Income
Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.

Liabilities
Present obligations of an entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic
benefits.

Matching concept
The assumption that in the measurement of profit, costs should be set against the
revenue which they generate at the point in time when this arises.

Materiality concept
Only items that are material in amount or in their nature will affect the true and fair
view given by a set of financial statements.

Measurement
The process of determining the monetary amounts at which the elements of the
financial statements are to be recognised and carried in the statement of financial
position and the comprehensive income statement. (The Framework for the
Preparation and Presentation of Financial Statements (IASC, 1989))

Measurement bases
The methods used to determine the monetary value.

Money measurement concept

Assumes that the performance and financial position of a reporting entity will be
expressed in monetary amounts (usually in the currency of the country where the
business is registered).
Ownership interest
The residual interest in the assets of the entity after deducting all its liabilities.

Prepaid expenses (prepayments)

Services paid for in advance (e.g. rent, insurance, road tax, local government taxes)
that have not been received at the end of an accounting year are treated as a cost of
the following accounting year, and thus carried forward as an asset at the end of the
current year.

Present value
Assets are carried at the present discounted value of the future net cash inflows that
the item is expected to generate in the normal course of business.

Prudence concept
Assumes that the financial statements have been prepared on a prudent basis. This
allows the user to have confidence that no profits are included that are not earned
and if not yet received, are reasonably certain to be received.

Realisable value
Assets are carried at the amount of cash or cash equivalents that could currently be
obtained by selling the asset in an orderly disposal.

Realisation concept
Profits shall be treated as realised, only when realised in the form either of cash or of
other assets (the ultimate cash realisation of which can be assessed with reasonable
certainty).

Revenue recognition
Assumes that a sale has taken place at that point in time at which the goods are
delivered or services provided (i.e. when the revenue is earned), and not when the
proceeds of sale are received. In practice this is normally also the date of the
invoice. However, where the invoice is rendered some time after the date of delivery,
the sale is deemed to have taken place on the date of delivery and not the date of
the invoice.
Separate determination concept
An entity should not offset assets and liabilities or income and expenses, unless
required or permitted by an IFRS. Netting transactions is only allowed when
offsetting reflects the substance of the transactions, or other event.

Substance over form

Assumes that when accounting for transactions the preparer should look at the
economic substance of a transaction, not its legal form.

Summary of significant accounting policies

Section in an entitys financial statements which details the accounting policies being
adopted by the company for material transactions.

Time period concept/time interval concept

The practice of dividing the life of an entity into discrete periods for the purpose of
preparing financial statements.